Piece by Piece

Diversification is beneficial, but that doesn’t mean a country-specific allocation should always be avoided…by Alice Rigby

 
Diversification may be the only free lunch in investing, but the routes that many of us take to achieving this end can be self-defeating.

In particular, many investors opt to allocate to a global equity fund or trust, in the belief that this will give them exposure to a breadth of businesses across the world’s indices. While this can go some way to meeting the diversification requirement, it can mean that some opportunities are left on the table.

Take the biggest funds in the AIC’s Global sector. Of the five largest, four have over 50% of their assets allocated to the US and the majority of their remaining assets are allocated to developed markets. Although this may not come as a surprise, as developed economies plunge into a period of stagnant growth, investors in these broader trusts could be missing out.

Several trends have driven the case for emerging markets countries over the past decade. They are decreasingly reliant on international trade, with their domestic markets flourishing as the middle class grows. The professionalization of their markets continues apace, with increasing market and financial regulation reducing risk for external investors.

However, the volatility of the macroeconomic context for many emerging economies means that dispersion between their performance remains. Given that the world’s economies are emerging from the COVID-19 pandemic at varying paces, and with varying degrees of success, it is possible that this dispersion will persist.

With that in mind, allocating to a selection of single-country funds could be an interesting prospect for some investors.

Vietnam is at a relatively early stage in terms of economic development when compared to its Asian peers, with domestic demand on the rise. The population of Vietnam is comparatively highly educated, while the government is investing heavily in the kind of infrastructure that encourages foreign direct investment – with Samsung and Apple among the global giants which have manufacturing operations now firmly established there.

It is in this context that Vietnam Enterprise Investments (VEIL) operates. The management team has extensive experience within the market, with Dragon Capital having operated there since 1994, and utilizes the trust’s closed-ended structure to invest pre-IPO. At the same time, the trust is on a wide discount, offering some downside protection.

India is another major destination of interest for those seeking exposure to emerging markets. While it is possible to gain exposure to Indian equities through a generic emerging markets fund, the undiluted exposure to this exciting market which is available via funds like Ashoka India Equity (AIE) makes a strong case for investing through a specialist.

The trust has been the top performer in its peer group (AIC India) since it launched in July 2018, due in part to a proprietary valuation model (OpcoFinco), which considers recurring cash flows after capital expenditures and financing costs have been accounted for – in a bid to avoid value traps, which have apparently low P/E ratios but actually have poor economic characteristics and cash flows as well.
 
Both managers presented at our ISA online event
 


 

 
Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.